by Clarence Lochhead

This article is drawn from a chapter in the forthcoming CCSD book, Canada's Income Security Programs, by Christopher Clark.

For more than a decade, governments have been retooling Canada's large-scale income security programs. Few Canadians have been untouched by the changes introduced to Employment Insurance, children's benefits, seniors' pensions, or social assistance. To keep pace with these changes, the Canadian Council on Social Development is publishing a book this spring called Canada's Income Security Programs, which describes how the major income security programs operate today.

The book also provides new information about the distribution of income security benefits among different groups in the population. Are the poor the only beneficiaries of income security programs? To what extent do families with children rely on government programs? What is the impact of income security programs on income inequality?

For most Canadian households, private income provides the foundation of their economic security and well-being. Earnings from employment, investment returns, private pension benefits, and money from other market sources (including scholarships, bursaries, alimony and severance pay) account for more than 85 per cent of Canadian households' total income. But as we found in our analysis, money collected by governments and redistributed in the form of income security benefits is also critical to the economic security of Canadians. While a program such as provincial social assistance provides support to the poorest Canadian households, other schemes, like the Child Tax Benefit, distribute money to a much broader range of income earners. And Employment Insurance – while covering a much smaller proportion of the unemployed than in the past – continues to provide benefits for modest-, middle-, and upper-income households.

How much money is redistributed?

In 1995, an estimated $74 billion was redistributed through income security programs, representing about 16 per cent of all pre-transfer income that year. The poorest 20 per cent of Canada's households, who earned less than one per cent of pre-transfer income, received nearly 40 per cent of all government income security benefits. After receiving government transfer payments, this group of Canadians was still left with less than six per cent of all household income. Nearly half of Canada's poorest households were headed by senior citizens; close to one-third were single people under age 65, and about one-tenth were headed by lone parents under age 65.

By comparison, the richest 20 per cent of Canada's households in 1995 earned nearly half of all pre-transfer income; they received eight per cent of all government income security transfers, and they ended up with 44 per cent of all household income. Most of the richest households were headed by two adults under age 65; nearly three-quarters of these households also had children living at home.

Overall, the income security system reduces income inequality among Canadian households. Whether the system does this sufficiently is a matter of some debate. Programs such as social assistance and the Guaranteed Income Supplement are specifically designed to provide assistance to the poor, and they lead to a reduction in income inequality. Other programs such as Old Age Security and the Canada and Quebec Pension Plans are directed more generally at Canada's senior population, but they also have the effect of redistributing funds to low-income households.

What is the impact on household income?

The poorest fifth of Canada's households rely very heavily on income security programs. In 1995, they received nearly 90 per cent of their annual income from government transfer payments. Even so, their average income was only $13,000. Income security benefits were also important for the next poorest group – raising their average income from less than $15,000 to $22,500. For middle- and high-income earners, government transfers provided smaller proportions of their total income, tapering off to less than three per cent for the richest group of households with average total incomes of nearly $100,000.

Which income groups benefit?

Our analysis shows that there are wide variations in the distribution of benefits from different income security programs. This is, in part, because some programs are designed to provide income support in order to reduce poverty, while others are social insurance schemes. Funds for the latter programs are raised through individual contributions – usually in the form of payroll deductions – and they are administered by governments. Employment Insurance and the Canada/Quebec Pension Plans are examples of social insurance programs. Because they are designed to protect workers' income, and because benefit levels are generally proportionate to earnings, middle-income households usually receive more from these programs than do low-income households.

On the other hand, income support programs such as provincial social assistance are paid for out of general government revenues, and their benefits are usually targeted to the poorest households. As Table 3 shows, three-quarters of social assistance in 1995 was received by the lowest-income group.

However, another income support program – the Child Tax Benefit – is distributed much more equally among income groups. Only the richest 20 per cent of households receive a significantly smaller proportion of this benefit than other quintiles. In part, this is because family households with children tend to have higher pre-transfer incomes than other groups – most notably senior citizens and single working-age adults. Nearly two-thirds of the money from the Child Tax Benefit in 1995 flowed to the poorest 40 per cent of households, but one-third of the money went to households with annual incomes between $37,600 and $75,565.

Employment Insurance benefits provide support to Canadians throughout the income range. The poorest 20 per cent of households received about 10 per cent of EI benefits in 1995, while the richest 20 per cent received more than one-sixth of EI payments. The majority of EI benefits in 1995 were received by people living in households with average total incomes of more than $36,000 per year.

Seniors rely on income security programs

One of the most startling findings from this review of the distribution of income security benefits was that most of Canada's seniors had little or no pre-transfer income. Because many seniors are either fully or partially retired, they typically have reduced earnings, and their pre-transfer income comes mainly from investments and private pensions. As a result, the actual amount of pre-transfer income received in 1995 by each quintile of senior households was significantly lower than it was for the general population (see Tables 1 and 4).

One-fifth of senior households received less than $65 per year in pre-transfer income, and 40 per cent collected less than $5,200. Only 20 per cent of senior households had pre-transfer incomes of more than $29,000 per year.

Within the senior population, total income security program benefits were distributed remarkably equally, with each seniors' income quintile receiving one-fifth of transfer income. Among all age groups, the elderly were the group most strongly supported by Canada's income security programs. In 1995, the poorest quintile of senior citizens relied on transfer payments for 90 per cent of their total income, while the middle quintile received 56 per cent of their total income from transfers. Even those in the highest quintile relied on income security programs for one-fifth of their total revenues.

NOTES

1. The analysis in this article is based on the Statistics Canada microdata file (Economic Families - 1995 Income) which contains data collected by the 1996 Survey of Consumer Finances. All computations on these microdata were done by the author, and the responsibility for the use and interpretation of these data is entirely that of the author.

In this article, "household" comprises what Statistics Canada refers to as "economic families"plus "unattached individuals." An economic family is defined by Statistics Canada as "a group of individuals sharing a common dwelling unit who are related by blood, marriage or adoption." An unattached individual is defined as "a person living alone or rooming in a household where he/she is not related to any other household members." These are the definitions outlined in the 1996 Survey of Consumer Finances.

2. This analysis considers only government transfer income and not in-kind benefits. The major components included in total transfer income were the following: the Child Tax Benefit; payments from Quebec Family Allowances and the Quebec Allowance for Newborn Children; Old Age Security, Guaranteed Income Supplement, and Spouse's Allowance payments; the Canada and Quebec Pension Plans; Employment Insurance; social assistance and other provincial income supplements; refundable provincial tax credits; and the Goods and Services Tax credit.

3. The tax system also affects the degree of inequality among Canadian households, however, its overall impact on inequality is a matter of some debate. Income taxes, for example, are progressive and reduce income inequality, but other forms of taxation such as consumption taxes are regressive and have the opposite effect.

4. It is important to note that the transfer incomes shown in Table 2 are averages, so while the average transfer income of households in the highest quintile was $2,377, two-thirds of these households received less than $1,000 in transfers, and 25 per cent received $2,000 or more.

5. Examples of "other" transfer payments include the following: veterans' pensions, pensions to widows and dependants of veterans, civilian war allowances, workers' compensation, payments received from training programs sponsored by the federal and provincial governments, Quebec Work Assistance programs, Quebec maternity allowances, regular payments received from provincial automobile insurance plans, and provincial grants for home ownership promotion, mortgage interest rate reduction, and property improvement.

Clarence Lochhead is the Director of the Centre for International Statistics at the CCSD.
The CCSD greatly appreciates the continuing support and assistance provided by Human Resources Development Canada and Statistics Canada.

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